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Taxes on a foreign property sale


Dear Tax Talk,
I live in California. I sold a property in Mexico. If I bring the money to the United States, do I owe income taxes (unearned income taxes) on it? Is this money considered as capital gains and taxed at the 30 percent rate? -- Albert

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Dear Albert,
I assume you are a resident of the United States and California for income tax purposes. Whether or not you bring the money to the U.S., you have an obligation to report the gain or loss on the sale of the property to the Internal Revenue Service.

Assuming the property was never rental property, then the gain or loss belongs on your Schedule D. If you used the property for rental purposes, then you should have reported the activity on Schedule E for all those years and claimed depreciation. In this case, the sale would be reported on Form 4797.

In either event, you need to calculate the cost and selling price of the property for determining gain or loss. Although in terms of Mexican pesos you may have had a gain, you need to figure if you had a gain in U.S. dollars. To determine these figures, use the exchange rate in effect at the time when you bought the property and do the same for the selling price on the date of sale.

For example, if you paid 300,000 Mexican pesos and at the time the rate of the peso to the dollar was three-to-one, your cost was $100,000. If you sold the property for 900,000 Mexican pesos at the time the exchange rate was nine-to-one, your selling price is the same as your cost and you have no gain or loss. Likewise, you would add the cost of improvements at the rate in effect when you made the improvements.

The actual tax rate assessed on the sale proceeds will depend on how long you owned the property. If you owned the property for a year or less, any gain will cost you more in taxes. These short-term assets are taxed at the same rate as your regular income, which could be as high as 35 percent on your 2004 return. If, however, you owned the property for more than a year (366-plus days) before you sold, it would be taxed at the long-term capital gain rate of, for most filers, 15 percent.

-- Posted: May 4, 2004




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